Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets

40 Pages Posted: 2 Dec 2014

See all articles by Klaus M. Schmidt

Klaus M. Schmidt

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management

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Date Written: November 28, 2014

Abstract

Pay What You Want (PWYW) can be an attractive marketing strategy to price discriminate between fair-minded and selfish customers, to fully penetrate a market without giving away the product for free, and to undercut competitors that use posted prices. We report on laboratory experiments that identify causal factors determining the willingness of buyers to pay voluntarily under PWYW. Furthermore, to see how competition affects the viability of PWYW, we implement markets in which a PWYW seller competes with a traditional seller. Finally, we endogenize the market structure and let sellers choose their pricing strategy. The experimental results show that outcome-based social preferences and strategic considerations to keep the seller in the market can explain why and how much buyers pay voluntarily to a PWYW seller. We find that PWYW can be viable on a monopolistic market, but it is less successful as a competitive strategy because it does not drive traditional posted-price sellers out of the market. Instead, the existence of a posted-price competitor reduces buyers’ payments and prevents the PWYW seller from fully penetrating the market. When given the choice, most sellers opt for setting a posted price rather than a PWYW pricing strategy. We discuss the implications of these results for the use of PWYW as a marketing strategy.

Keywords: customer-driven pricing mechanisms, pay what you want, price discrimination, revenue management, social preferences

JEL Classification: D03

Suggested Citation

Schmidt, Klaus M. and Spann, Martin and Zeithammer, Robert, Pay What You Want as a Marketing Strategy in Monopolistic and Competitive Markets (November 28, 2014). CESifo Working Paper Series No. 5069. Available at SSRN: https://ssrn.com/abstract=2532864

Klaus M. Schmidt (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 3405 (Phone)
+49 89 2180 3510 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Martin Spann

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28
Munich, 80539
Germany

Robert Zeithammer

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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